This article is part of a series of analyses on the challenges facing banking this decade, by Dr. Andrei Radulescu, Director of Macroeconomic Analysis, Banca Transilvania.

Romania’s banking sector has proved resilient to the pandemic and its effects so far, helped by a number of factors, including the prompt and supportive response from the authorities implementing economic policy at both European Union and domestic level, as well as the lessons banks learned from the previous crisis.

At present, the sector’s solvency ratio stands at 23.88% in Q2 2021, near all-time highs, well above the minimum requirements and also above the level recorded in March 2020, when the health crisis hit, of 20.37%. Looking at the Tier 1 capital ratio in a comparative perspective, the local banking sector’s level is very high versus Germany, the Eurozone’s largest economy and Romania’s main trading partner.

Banking sector solvency ratio – Romania vs. Germany (TIER 1)

Source: Bloomberg

In the context of the pandemic, banks on the local market have also continued to lend to the economy, reinforcing their role as the main source of financing for the domestic economy, as shown by the increase in assets — by over 67 billion lei between end-March 2020 and the end of the first half of 2021.

Asset growth in Romania’s banking sector (billion lei)

Source: National Bank of Romania

Banks also accelerated lending in 2021, with non-government credit up 12.8% year-on-year in August, the strongest pace since 2009, as the chart below shows.

In other words, the banking sector has not only increased its sovereign exposure in recent months, but has also accelerated the build-up of private-sector exposure: between December 2020 and August 2021, credit to non-financial corporations and to households rose by RON 14.4 billion and RON 14.8 billion, respectively.

Unlike the Eurozone, Romania’s banking sector has sped up lending in the recent period, as can be seen in the next chart.

We would stress that Romania’s banking sector stands ready at any time to increase its exposure to the private sector (companies and households), while complying with regulatory requirements and calibrating decisions to risk factors, so as not to jeopardise short-term solvency and medium-term financial stability.

Non-government credit (%, y/y)

Sources: National Bank of Romania, European Central Bank

Last but not least, banking sector profit in Romania rose by over 48% y/y in the first half of 2021, with a renewed pick-up in ROE (return on equity) and ROA (return on assets) to 12.98% and 1.43%, respectively, as shown in the chart below.

A high return on equity is very important both from the perspective of banks’ shareholders (who seek to maximise profit) and for the sector’s viability.

Trend in banking sector profitability indicators (%)

 Source: National Bank of Romania

In this context, we underline that the banking sector will withstand the risks stemming from short-term fluctuations in yields on government securities, given the high solvency ratio.

Trend in the public debt-to-GDP ratio (%) 

Source: Eurostat

To conclude this series on the banking sector, we would highlight a few points regarding the impact of banks’ exposure to Romania’s public sector:

• Romania’s public debt-to-GDP ratio is very low compared with the Eurozone — in 2020 this indicator rose by only 12 percentage points y/y to 47.3% in Romania, versus an increase of 14.1 percentage points y/y to 98% in the Eurozone, as shown in the chart below;
• Romania has significant medium-term potential for nominal GDP growth, which will help reduce the public debt-to-GDP ratio and ease pressure on government security yields;
• EU fiscal rules are suspended until 2023, and the Eurogroup has recently signalled a rethink of these rules;
• We expect yields on Romanian government securities to converge towards Eurozone levels in this decade, which will have a positive impact on banks’ balance sheets (higher bond valuations);
• Alternatives to reducing banks’ sovereign exposure include increasing cash and cash equivalents (not desirable at present, given rising inflation — annual consumer price growth of over 5% in August) or moving capital abroad (hard to envisage, given the domestic economy’s development potential);
• The recent increase in government security yields (driven by political tensions) is short-lived; once the political crisis ends, we expect them to decline, with a positive impact on banks’ balance sheets;
• The deterioration in public finances after the pandemic at both global and European level is temporary (driven by the large-scale programmes rolled out by governments to counter the health crisis and its impact on the economy), and the fiscal consolidation process could be an opportunity to redesign the structure of public finances globally.

This series also includes:

• A paradigm shift in monetary policy
• Excess liquidity building up in the banking sector
• Banking system asset structure – developments in the Eurozone, Romania’s main economic partner
• Structural developments in Romania’s banking sector after the Global Financial Crisis